Markets & economy

The winds of change

While the election of Donald Trump as the next president of the United States was not expected by investors, it does not seem to have been unwelcome: both the dollar and US equities have appreciated significantly. The casualty has been bond prices. In all markets, including South Africa, long-term interest rates have increased significantly. With the US at close to full employment, inflationary pressures are rising. Trump’s proposals to increase spending on infrastructure and to cut taxes will exacerbate these pressures.

On 13 December the Federal Reserve Board raised US short-term rates by 0.25% to 0.50% and the market is pricing in further increases in 2017. The dollar is the world’s reserve currency. Rising rates in the US will put pressure on other countries to follow suit. The currencies of countries where rates remain at or near zero will depreciate. Policies in the major economies are becoming increasingly uncoordinated. A probable consequence will be greater volatility in financial markets.

During the past six months commodity prices, particularly of coal and iron ore, have surged. Probable causes include increasing demand in China, where the government has stimulated consumption by aggressive money creation, low inventories and speculation fuelled by easy money. Oil prices have responded favourably to proposed production cuts by the Organisation of the Petroleum Exporting Countries (OPEC). South Africa, as a commodity exporter, has been a beneficiary of this change in fortunes, and increased export revenue has helped to stabilise our economy, which at the start of 2016 was flirting with recession.

South Africa remains in a state of economic stagnation. Due to resolute action by the National Treasury, we avoided a downgrade by the international ratings agencies, but political struggles within the ANC have created policy paralysis, which has had an extremely damaging impact on domestic investor confidence. Private sector investment remains subdued. Without increased investment our economic malaise will continue.

In November 2016 the annual rate of inflation as measured by the South African Consumer Price Index (CPI) was 6.6%. Given current trends it will likely fall back below the Reserve Bank’s 6% target in 2017. Provided there is no political shock similar to Nenegate in December 2015, further increases in short-term interest rates in the first half of 2017 are unlikely.

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